qprt

# Qualified Personal Residence Trust (QPRT) Agreement

Drafts an irrevocable QPRT transferring a personal residence to remainder beneficiaries at a reduced gift tax value while the grantor retains rent-free occupancy for a specified term. Compliant with IRC §2702 and Treas. Reg. §25.2702-5(c).

## Prerequisites

Gather before drafting:

1. **Parties** — Grantor, initial trustee, and all remainder beneficiaries (full legal name, address, DOB, relationship, SSN/TIN, percentage share)
2. **Property** — Legal description from deed, street address, tax parcel number, county/state; confirm principal vs. qualified secondary residence per Treas. Reg. §25.2702-5(c)(2)(i)
3. **Valuation** — Qualified appraisal of FMV as of anticipated transfer date
4. **Planning parameters** — Grantor's age, health/longevity factors, desired retained term (years), applicable IRC §7520 rate (transfer month or either of two preceding months)
5. **Existing estate plan** — Prior gifts, lifetime exemption usage, will/revocable trust, GST exemption allocation history
6. **Governing law** — State of situs; note if grantor domicile differs

## Trust Instrument Articles

### Art. I — Preamble & Definitions

- Identify grantor, trustee, execution date, governing law state
- Declare trust irrevocable; recite QPRT intent under Treas. Reg. §25.2702-5(c)
- Define: Residence, Retained Interest Term, Term Expiration Date, Remainder Beneficiaries, §7520 Rate, Qualified Personal Residence

### Art. II — Trust Property & Permitted Holdings

| Item | Requirement |
|---|---|
| Exhibit A | Verbatim legal description; all easements and appurtenances |
| Cash holdings | ≤ 6 months' operating expenses + improvement/replacement reserve (Treas. Reg. §25.2702-5(c)(5)(ii)) |
| Sale of residence | Replacement purchase within 2 years; excess → grantor distribution or GRAT conversion |
| Casualty/destruction | Insurance proceeds to repair/replace; if infeasible → reversion or GRAT conversion |

### Art. III — Retained Interest Term & Grantor's Rights

- Exact term (years), commencement date, calculated Term Expiration Date
- Retained rights: exclusive rent-free occupancy, fixtures/furnishings use, right to exclude; personal and non-transferable
- Grantor responsible for ordinary maintenance; trustee oversees property condition
- Third-party rental only if grantor uses property ≥ greater of 14 days/year or 10% of rented days (Treas. Reg. §25.2702-5(c)(2)(i))
- **Death during term:** Full date-of-death FMV included in gross estate under IRC §2036(a); gift tax benefit eliminated

### Art. IV — Post-Term Occupancy

- No occupancy right post-term absent arm's-length lease at FMR
- Rent paid in cash (check/ACH) under formal written lease
- FMR failure → IRC §2036(a)(1) estate tax inclusion risk
- If reduced-rent occupancy permitted, document that estate tax inclusion results

### Art. V — Remainder Beneficiaries & Distribution

- Each beneficiary: name, address, DOB, relationship, SSN/TIN, percentage (must total 100%)
- Contingent remainder: deceased beneficiary's share → descendants per stirpes
- Election: outright distribution vs. continuing trust (address occupancy, rent allocation, buy-sell, expense allocation)
- Deadlock: trustee authority to order appraisal and compel sale within [X] days of term expiration

### Art. VI — Trustee Powers & Limitations

**Authorized:** maintain/repair/improve residence; pay taxes, assessments, insurance; hold cash within Treas. Reg. §25.2702-5(c)(5)(ii) limits; engage contractors

**Prohibited during term:** distribute to anyone but grantor (except operating expenses); sell/encumber without grantor's written consent (any sale must comply with replacement/GRAT rules)

**Fiduciary duties:** loyalty, impartiality, duty to inform; annual written accounting

### Art. VII — Trustee Succession & Removal

- Successor trustee(s) on death, resignation, or incapacity (two-physician certification or guardian appointment)
- Resignation: 60-day written notice; removal by majority beneficiary vote after term
- Grantor's removal power during term: limited to replacement with independent trustee (avoid IRC §2036)

### Art. VIII — Tax Status & Reporting

| Item | Rule |
|---|---|
| Income tax | Grantor trust (IRC §§671–679); all items on grantor's 1040 |
| Gift tax | Form 709 in transfer year; gift = FMV − actuarial retained interest (§7520 + Pub. 1457) |
| GST | If skip persons among remaindermen, allocate on full FMV (not discounted gift) |
| Death during term | Full FMV in gross estate (IRC §2036(a)); stepped-up basis |
| Survival of term | Carryover basis = grantor's adjusted basis + gift tax on appreciation (IRC §1015) |

### Art. IX — Termination Events

| Event | Result |
|---|---|
| Grantor survives term | Deed transfer; final accounting; basis documentation |
| Death during term | Beneficiaries notified; estate administration; inclusion applies |
| Disqualifying event | Reversion to grantor OR GRAT conversion (Treas. Reg. §25.2702-3); include conversion mechanics |

Trustee duties continue until all property distributed, returns filed, and administration complete.

### Art. X — Administrative Provisions

- **Governing law:** State of situs; disputes in designated jurisdiction courts
- **Severability:** Reform to minimum extent; §2702 qualification controls interpretation
- **Amendment:** No changes to beneficial interests; administrative amendments for QPRT qualification or scrivener's errors only
- **Notices:** Written; personal delivery, certified mail (RRR), or overnight courier

### Art. XI — Spendthrift & Creditor Protection

- No voluntary/involuntary transfer, assignment, or encumbrance of beneficiary interests
- Creditors cannot reach trust assets by attachment, garnishment, or execution
- Grantor's retained interest may be reachable by grantor's creditors during term (jurisdiction-dependent)
- Address exception creditors (child support, alimony, tax authorities) per state law

### Art. XII — Execution & Exhibits

**Signature blocks:** Grantor (acknowledges irrevocability and tax consequences), Trustee (accepts fiduciary duties), two disinterested witnesses, notarial acknowledgment (seal, commission expiration)

**Exhibits:** (A) Verbatim legal description from deed; (B) Beneficiary schedule with identifying information and percentage interests

## Post-Execution Checklist

- [ ] Record deed from grantor individually to grantor as QPRT trustee (local recording requirements; transfer tax declaration/exemption)
- [ ] File Form 709 by April 15 of following year; attach agreement and appraisal
- [ ] Update property/casualty insurance to name trust as insured
- [ ] Notify property tax authority of ownership change
- [ ] Obtain liability insurance in trust name
- [ ] Establish FMR lease protocol if post-term occupancy anticipated
- [ ] Begin annual trustee accounting from transfer date

## Critical Compliance Points

- **§7520 rate:** Choose transfer month or either preceding month — higher rate = larger retained interest = smaller taxable gift
- **Term length:** Must not exceed actuarial life expectancy; shorter terms reduce mortality risk but reduce savings
- **Residence limit:** One principal + one secondary residence in QPRTs simultaneously (Treas. Reg. §25.2702-5(c)(2)(i))
- **Grantor as trustee:** Permissible; use independent successor to avoid §2036 on removal
- **Post-term rent:** Must be FMR, actually paid, documented — most common compliance failure
- **GST allocation:** Based on full FMV, not discounted gift amount
- **Basis tracking:** Maintain grantor's adjusted basis records throughout; critical for beneficiary's future sale
- **[VERIFY]** Rev. Proc. 2003-42 safe harbor language — confirm no superseding IRS guidance
- **Jurisdiction:** State-specific recording, transfer tax, and homestead rules vary; confirm before executing deed